Uncertain tax positions, provisions, estimates, principal risks and uncertainties

Koninklijke Philips N.V. – Annual report – 31 December 2025

Industry: manufacturing

Risk factors and responses (extract)

Philips is exposed to tax risks which could have a significant adverse financial impact

Philips is exposed to tax risks that could result in double taxation, penalties and interest payments. The source of the risks could originate from local tax laws and regulations as well as international and EU regulatory frameworks. These tax risks include transfer pricing risks on internal cross-border deliveries of goods and services, as well as tax risks relating to changes in the transfer pricing model. Examples of initiatives that may result in changing tax rules include, but are not limited to, the OECD/G20 Inclusive Framework to address the allocation of income to user markets (Pillar One) and a 15% minimum corporate income tax rate (Pillar Two).

The formal adoption of the Council Directive (EU) 2022/2523 (the Pillar Two Directive) in December 2022 achieved a coordinated implementation of Pillar Two in EU Member States. The Dutch government adopted the Minimum Tax Rate Act 2024 (MTR Act) in December 2023, and the Pillar Two legislation has been applicable in local law with effect from 2024 in the Netherlands, the EU and many other countries around the world. However, the US withdrawal from the OECD Pillar agreements, the pending implementation in local laws of the statement issued by the Group of Seven (G7) on June 28, 2025 on outlining a compromise on certain aspects of Pillar Two, including the January 5, 2026 ‘side-by-side’ package agreed between the United States and the OECD Inclusive Framework exempting US-parented multinational enterprises from Pillar Two brings uncertainty and potential risk of retaliatory tax measures.

As Philips maintains substance in the form of relevant assets and personnel in the countries in which it operates, Philips meets the transitional safe harbor rules enacted by OECD in most countries and therefore exposure to Pillar Two taxation is currently not material from a group perspective. However, the future of the safe harbor rules, including the implementation of the side-by-side safe harbors is uncertain and Pillar Two increases Philips’ tax compliance burden significantly globally.

For Pillar One, the OECD’s final guidance on Amount B (a simplified and streamlined approach for applying the arm’s length principle to in-scope baseline marketing and distribution activities, as incorporated into the OECD Transfer Pricing Guidelines), effective for fiscal years commencing on or after January 1, 2025, introduces a standardized approach for determining the arm’s length returns for such activities. While the framework aims to enhance tax certainty and reduce compliance costs, it may also give rise to new tax risks. These include the risk of double taxation due to potential mismatches between implementation in local law and existing transfer pricing policies and challenges in determining eligibility for the simplified regime.

The enactment of the One Big Beautiful Bill Act in July 2025 introduces significant changes to US tax rules, including revised R&D expense amortization, enhanced export incentives, and a permanent 10.5% Base Erosion and Anti-Abuse Tax rate effective 2026, favoring US-based companies and operations. While the immediate financial impact on Philips is limited, these measures and ongoing US discussions on tax retaliatory measures, for example against jurisdictions imposing digital service taxes (being a tax on gross revenue derived from a variety of digital services), expose Philips to financial risk and uncertainty.

Furthermore, Philips is exposed to tax risks related to acquisition and divestment, permanent establishments, tax loss, interest and tax credits carried forward, and potential changes in tax law that could result in higher tax expenses and payments. The risks may have a significant impact on local financial tax results, which could adversely affect Philips’ financial condition and operating results. The value of the deferred tax assets, such as tax losses carried forward, is subject to the availability of sufficient taxable income within the tax loss-carry-forward period. Accordingly, there can be no absolute assurance that all deferred tax assets, such as (net) tax losses and credits carried forward, will be realized.

Implemented and potential tariffs and other restrictions on imports proposed by the US administration, and retaliatory trade measures in response thereto, have impacted and may continue to impact international trade relations, supply chains and pricing strategies, with notable consequences in the countries where we are present. In addition, protectionism may increase general uncertainty on the development of local regulations in response to those measures. These uncertainties expose Philips to financial risk linked to increased trade defense measures resulting in additional tariffs and customs duties. Significant changes in import duties levied on the import of products could materially impact Philips.

Risk response: Philips has a globally organized and experienced Tax function, which is accountable for the definition and execution of the tax strategy and for the tax position of Philips worldwide. It advises management on the tax implications of intended decisions, performs appropriate tax planning to support business goals, and safeguards compliance with all local and international tax laws.

Philips has a Tax Control and Governance Framework in place, which is designed to create awareness of and ensure adherence to current tax policies. Tax risk oversight is led by the Head of Tax, with regular updates to the Audit Committee.

Philips is monitoring legislative developments in relevant jurisdictions to ensure compliance. As of the reporting date, no jurisdiction has enacted OECD Pillar One – Amount B into domestic law. Philips is in compliance with Pillar Two rules, whereby we are leveraging our existing tax systems to support a quality process to determine countries out of scope, calculate the additional tax liability (if any) and enable timely filing of returns and registrations as efficiently as possible. For more details on Pillar Two, please refer to Income taxes.

Philips continues to monitor the US tax developments and assess potential long-term implications. Potential risks are carefully monitored and dealt with by tax specialists from relevant areas (e.g., corporate income tax, transfer pricing, indirect taxes, wage tax and tax accounting). There are extensive controls in place on processes and systems to address these risks, which are discussed in more detail in our Country Activity and Tax Report available on our website, and in the note Income taxes.

Notes to the Consolidated financial statements (extract)

1 General information to the Consolidated financial statements (extract)

Accounting estimates and judgments

The preparation of these financial statements requires management to make a number of estimates and judgments that affect the application of accounting policies and the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Amounts recognized are based on factors that are by default associated with uncertainty. Actual results may therefore differ from estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revision to estimates are recognized prospectively. Where applicable, the estimates and judgments of specific financial statement items are described in the respective note to the consolidated financial statements.

The areas involving a higher degree of judgment and complexity in applying accounting principles and for which changes in the assumptions and estimates could result in significantly different results than those recorded in the consolidated financial statements are the following:

The company regularly updates its significant assumptions and estimates to support the reported amounts of assets, liabilities, income and expenses.

Climate change

In preparing the consolidated financial statements, management has considered the impact of climate change, specifically the financial impact of Philips meeting its internal and external climate-related aims, the potential impact of climate-related risks, and the costs incurred to pro-actively manage such risks. These considerations did not have a material impact on the financial reporting judgments, estimates or assumptions. The financial impacts considered include specific climate mitigation measures, such as the use of lower-carbon energy sources, the cost of developing more sustainable product offerings, and expenses incurred to mitigate against the impact of extreme weather conditions. To meet its long-term Science Based Targets and reduce its full value chain emissions in line with a 1.5 °C global warming scenario, Philips has entered into a number of Power Purchase Agreements. Philips uses 100% electricity from renewable sources, mainly through long-term Power Purchase Agreements, thereby mitigating the impact of carbon taxes. The development of more sustainable products are covered through our EcoDesign program and already included in our R&D expenses. The physical risk related to climate change on our sites resulting from our Task Force on Climate-Related Financial Disclosures assessment is currently considered limited.

8 Income taxes (extract 1)

Accounting estimates and judgments (extract)

Uncertain tax positions

Uncertain tax positions are recognized as current tax liabilities when it is probable that additional income taxes will be payable and the amount can be reliably measured. Liability is measured at the amount expected to be paid to the tax authorities, using either the most likely amount or the expected value, depending on which method better predicts the resolution of the uncertainty.

8 Income taxes (extract 2)

Income tax liabilities in millions of EUR

20252024
Uncertain Tax Positions ¹(70)–
Income tax payable(104)(71)
Income tax liabilities(174)(71)

¹ Uncertain tax positions were shown as non-current tax liabilities in 2024

The expected liabilities reported as uncertain tax positions are included in current income tax liabilities (2025: EUR 70 million) and reclassified from other non-current liabilities (2024: EUR 116 million).

The decrease in uncertain tax positions mainly relates to release of positions on expiry of the statute of limitations for tax audits, in combination with netting of the uncertain tax positions with recognized tax assets, such as carryforward tax losses or tax receivables.

Tax risks

Philips is exposed to tax risks and uncertainty over tax treatments. For particular tax treatments that are not expected to be accepted by tax authorities, Philips either recognizes a liability or reflects the uncertainty in the recognition and measurement of its current and deferred tax assets and tax attributes. For the measurement of the uncertainty, Philips uses the most likely amount or the expected value of the tax treatment. The positions include, among others:

Transfer pricing risks

Philips has issued transfer pricing directives, which are in accordance with international guidelines such as those of the Organisation of Economic Co-operation and Development. In order to reduce the transfer pricing uncertainties, monitoring procedures are carried out by Group Tax to safeguard the correct implementation of the transfer pricing directives. However, tax disputes can arise due to non-harmonized transfer pricing regimes and different views on ‘at arm’s length’ pricing.

Tax risks on general and specific service agreements and licensing agreements

Due to the centralization of certain activities (such as Research & Development, IT and group Functions), costs are also centralized. As a consequence, these costs and/or revenues must be allocated to the beneficiaries, i.e., the various Philips entities. For that purpose, service contracts such as intra-group service agreements and licensing agreements are signed with a large number of group entities. Tax authorities review these intra-group service and licensing agreements, and may reject the implemented intra-group charges. Furthermore, buy-in or -out situations in the case of (de)mergers could affect the cost allocation resulting from the intra-group service agreements between countries. The same applies to the specific service agreements.

Tax risks due to disentanglements and acquisitions

When a subsidiary of Philips is disentangled, or a new company is acquired, tax risks may arise. Philips creates merger and acquisition (M&A) teams for these disentanglements or acquisitions. In addition to representatives from the involved business, these teams consist of specialists from various group Functions and are formed, among other things, to identify tax risks and to reduce potential tax claims.

Tax risks due to permanent establishments

A permanent establishment may arise when a Philips entity has activities in another country; tax claims could arise in both countries on the same income.